CT Property and Casualty Insurance Law Newsletter – May 2023
May 31, 2023
U.S. District Court – Property Coverage – COVID-19 Business Losses
In Amphenol Corporation v. Factory Mutual Ins. Co., the plaintiff was a manufacturer and distributor of electronic, electrical, and fiber optical components and systems. The plaintiff claimed to have suffered in excess of $100 million in property damage and lost business income as a result of the COVID-19 pandemic. The defendant filed a motion for judgment on pleadings and argued that the plaintiff’s economic losses did not trigger coverage because the coronavirus did not cause “physical loss or damage” as defined by the applicable insurance policy, in that “physical loss or damage” requires structural damage to facilities or equipment (requiring repair or replacement) and the virus did not physically deteriorate any property; any resulting harm could be eradicated with mere cleaning or the simple passage of time. The Court recognized the growing body of case law (from the Supreme Court of Connecticut, the District of Connecticut, and the Second Circuit) in which courts have found that the coronavirus did not cause physical loss or damage pursuant to insurance contracts with substantially similar terms to those in the subject policy. The plaintiff argued that the defendant’s cited cases hinge upon pleading deficiencies that were nonexistent in this case, and asserted that it has suffered qualifying physical loss in that “loss” includes loss of use, not simply a sufficient degree of physical damage, and it clearly lost the ability to use its facilities. The plaintiff further asserted that our understanding of the coronavirus continues to evolve, and that recent discoveries show the virus capable of bonding to and absorbing into surfaces, allowing those surfaces to transmit the virus through contact, thus rendering the facilities housing such surfaces unfit for intended use. The plaintiff alleged that this qualified as structural alteration sufficient to satisfy the policy. The plaintiff also alleged specific structural responses to the pandemic that it contended qualified as “damage,” such as adjustments to facility layouts and replacing HVAC filters and units. The plaintiff also argued that the ability to clean surfaces does not bar coverage, but merely helps assess loss, and that the air through which coronavirus has been dispersed could not be cleaned. The Court noted that although the plaintiff clearly attempted to plead around prior court decisions by alleging damage and consequential repairs, the only “damage” the complaint specifically described was the presence of viral particles on surfaces, and the only “repairs” described were the cleaning (specialized as it was) of the plaintiff’s facilities, the installation of additional barriers and workspaces, and the replacement of HVAC units and filters. However, prior court decisions have made clear that cleaning and refitting existing structures to address new safety needs do not qualify as “repairs.” Moreover, there was no allegation that there was any actual damage to the replaced HVAC filters or units. As generally happens during routine maintenance, the filters apparently performed their function (though quicker than anticipated) and were replaced. And there was no claim that the units themselves no longer functioned as intended; it is not indicative of damage that changing business needs cause a piece of equipment to no longer perform at its required level. Accordingly, the Court concluded that the plaintiff failed to show “physical loss or damage” sufficient to trigger coverage under the policy. The defendant’s motion for judgment on the pleadings was granted.
Supreme Court – Underinsured Motorist Benefits – PTSD Claim, Dram Shop Claim and Collateral Source
In Menard et al v. State of Connecticut, the plaintiffs were two state troopers who had been standing in the roadway during a traffic stop when another vehicle struck a parked police cruiser, leading to a collision with the plaintiffs. Both plaintiffs presented claims for damages caused by alleged post-traumatic stress disorder (“PTSD”). Both plaintiffs also received pretrial settlement payments as a result of claims they had presented under Connecticut’s Dram Shop Act. On appeal to the Supreme Court, the plaintiffs contended that the Appellate Court improperly: (1) affirmed the trial court’s judgments insofar as the trial court concluded that the plaintiffs were not entitled to recover underinsured motorist benefits for PTSD, and (2) reversed the judgments insofar as the trial court determined that the State of Connecticut was not entitled to a reduction in the trial court’s awards for sums received by the plaintiffs in settlement of their dram shop claims. The trial court had rejected the respective PTSD claims on two grounds. First, it concluded that PTSD damages are not compensable under the uninsured motorist/underinsured motorist (“UM/UIM”) statute prescribing coverage for damages “because of bodily injury”. The trial court found that the plaintiffs’ PTSD claims were not a result of their physical injuries. Rather, they were premised on having gone through a life-threatening accident and having to reexperience similar work-related scenarios on a regular basis. Second, the trial court did not credit the diagnostic opinion and the testimony of the plaintiffs’ expert witness. The Appellate Court rejected the notion that it was material whether the plaintiffs’ alleged PTSD, which was not caused by physical injuries sustained in the collision, had accompanying physical manifestations. In light of its conclusion that there was no coverage for the plaintiffs’ PTSD claims under the statute, the Appellate Court declined to reach the plaintiffs’ claim that the trial court had erred in failing to credit the opinion of the plaintiffs’ expert witness. Regarding the issues pertaining to calculation of damages, the trial court determined that the plaintiffs’ workers’ compensation benefits were deductible from their damages but that their dram shop recoveries were not. The Appellate Court ruled that the trial court’s failure to reduce the plaintiffs’ damages by their dram shop recovery violated the common-law rule against double recovery. The Supreme Court concluded that the plaintiffs’ PTSD claims failed on grounds of evidentiary insufficiency. The record in the case demonstrated that the trial court’s rejection of the expert’s testimony was not impermissibly arbitrary. Therefore, in the absence of credible expert testimony, the plaintiffs could not recover damages for PTSD, even if coverage was afforded for such an injury under the UM/UIM statutory scheme and the State of Connecticut’s UM/UIM policy. The Supreme Court declined to reach the broader legal question as to whether the UM/UIM statute affords coverage for PTSD, if accompanied by physical manifestations. The Supreme Court also concluded, however, that the plaintiffs’ damages should not have been reduced by the sum of their pretrial dram shop settlement payments. The Supreme Court recognized that the trial court may reduce the damages to account for pretrial settlement payments, whether in a trial to the jury or to the court, when the award would otherwise be excessive as a matter of law in the absence of such a reduction. The Supreme Court acknowledged that in the present case, the settlement may have contemplated payment for damages that were not included, or available, in the subsequent action on the matter. The dram shop settlement payments, for example, may have contemplated damages for PTSD, which were not included as part of the trial court’s award, and, according to the State of Connecticut, were legally unavailable in this action. What portion, if any, of the settlement payments was dedicated to such damages, which the courts below deemed unavailable by law in a UM/UIM action, was entirely speculative. Thus, the plaintiffs’ damages award could not be deemed excessive as a matter of law under such circumstances. The Supreme Court also rejected the State of Connecticut argument that the dram shop settlement payments were a “collateral source” for which a reduction would be appropriate. Finally, the Supreme Court concluded that the dram shop settlement payments did not fall within the exception, in the state regulations, for sums “paid by or on behalf of any person responsible for the injury” because a claim under that Dram Shop Act does not require proof that the dram shop was responsible for the injury.
Superior Court – Connecticut Unfair Trade Practices Act – Professional Negligence
In 72 South Main Street LLC v. Welsh et al, the plaintiff property owner filed an action against an insurance agency and an individual insurance broker employee for alleged failure to secure adequate insurance coverage. The plaintiff had obtained a loan to finance the renovation and restoration of its building. The plaintiff hired the defendants to give advice about and obtain insurance satisfying the requirements of the loan that would fully protect the plaintiff’s interests in its building and the renovation project. The broker obtained, and the plaintiff paid for, a builder’s risk insurance policy that purportedly covered the building during the renovation. During the coverage period of the builder’s risk insurance, an event occurred inside the building causing substantial water damage and other related losses. When the plaintiff made a claim under the builder’s risk insurance, it was denied because the building was not completely vacant. At the time the plaintiff contracted with the defendants, an endorsement to the builder’s risk insurance was available that would extend coverage to partially occupied buildings, but the defendants allegedly failed to advise the plaintiff of the endorsement or to obtain it on the plaintiff’s behalf. The defendants also allegedly advised the plaintiff to cancel or facilitated the cancellation of commercial property insurance already in effect prior to the event that would have covered some or all of the plaintiff’s losses not covered by the builder’s risk insurance. The defendants moved to strike the plaintiff’s claims for breach of contract, negligent misrepresentation and violation of the Connecticut Unfair Trade Practices Act (“CUTPA”). Although the plaintiff alleged various deficiencies in the defendants’ rendering of professional services, it did not allege that these deficiencies constituted a failure to perform specific contractual provisions, obey specific instructions, or attain specific results. Rather, they merely suggested that the defendants’ insurance brokerage services did not accord with requisite professional standards. Because these allegations sounded in professional negligence rather than in breach of contract, the Court granted the motion to strike as to the counts for breach of contract. Regarding the claims for negligent misrepresentation, the Court found that when reading the complaint broadly and realistically and interpreting it most favorably to the plaintiff, the plaintiff’s allegations were based on representations of fact by the defendants, not opinions or puffery, and, therefore, the plaintiff had sufficiently alleged claims of negligent misrepresentation. The motion to strike was denied as to those claims. The legal sufficiency of CUTPA claims required a more detailed analysis by the Court. Connecticut courts have held that professional malpractice does not give rise to a cause of action under CUTPA, and that CUTPA is only implicated against a professional when the actions at issue are chiefly concerned with the entrepreneurial aspects of practice, such as the solicitation of business and billing practices, as opposed to claims directed at the competency and strategy employed by the defendant. The majority of trial courts considering the issue have held that a claim against an insurance broker or agency alleging professional negligence without more is barred by the professional services exception to CUTPA. In this case, the Court adopted the majority approach and then went on to determine whether the plaintiff’s CUTPA claims alleged mere professional negligence or something more. The plaintiff alleged that the defendants violated CUTPA by committing multiple acts prohibited by the Connecticut Unfair Insurance Practices Act (“CUIPA”). The Court found that the plaintiff’s CUTPA claims consisted of allegations sounding in professional negligence, rather than any conduct placing the claims within the scope of CUTPA pursuant to CUIPA. The plaintiff did not allege that the defendants misrepresented the terms of the insurance policy they obtained on its behalf, rather, the basis of the plaintiff’s CUTPA claims was that the defendants failed to meet their professional obligation to exercise reasonable care in obtaining adequate insurance for the plaintiff to satisfy its lender’s requirements. The Court further found that the CUTPA claims did not implicate any entrepreneurial aspect of the insurance business such as billing or business solicitation that are actionable under CUTPA, rather, the factual allegations therein centered on the defendants’ failure to procure appropriate insurance to compensate the plaintiff in the event of a loss, which supported professional negligence claims. For these reasons, the motion to strike the CUTPA claims was granted.
U.S. District Court – Property Coverage – Motion To Compel Appraisal
In Residences at Quarry Walk LLC v. New York Marine and General Ins. Co. et al, the plaintiff presented a claim for property damage after its building caught fire. The defendants moved to compel appraisal pursuant to the applicable insurance policies and argued that the case simply involved a dispute over the amount of losses suffered by the plaintiff. The defendants argued that compelling an appraisal will resolve factual disputes over the amount of the plaintiff’s loss, and promote judicial economy by streamlining any issues that remain for trial. The plaintiff argued that the defendants waived the appraisal provision because they waited too long to demand an appraisal and the plaintiff would suffer prejudice if an appraisal was ordered because of the extensive discovery that has been conducted. The plaintiff also argued that the disputed issues in the case involved coverage, not valuation, and thus were inappropriate for an appraisal. The claim components in dispute were Overhead and Profit, Direct Repair Costs/Labor Claim, Loss of Rental Income, Additional Soft Costs, and Co-Insurance Penalty. The defendants conceded the existence of coverage on all the disputed items, except the Additional Soft Costs claim. The defendants agreed with the plaintiff that this claim was not appropriate for appraisal because it involved a coverage issue. However, the defendants argued that the coverage dispute regarding Additional Soft Costs did not need to be resolved prior to an appraisal on the claims for which the defendants conceded coverage. The defendants also argued that they did not waive their appraisal rights because the insurance policies do not impose any time constraint for requesting an appraisal. The defendants asserted that they mentioned the appraisal several times to the plaintiff’s counsel, and they formally requested an appraisal after the last claim adjustment was finalized. Furthermore, the defendants contended that the plaintiff took the position that an appraisal was “premature” because the adjustment was not completed. The defendants also argued that the plaintiff contributed to the delay in the adjustment by submitting necessary documents late. The plaintiff argued that all of the disputes related to “coverage” and all the claims were legal questions which were not appropriate for an appraisal. The plaintiff argued that the defendants refused to pay the entirety of the plaintiff’s claimed losses over the course of the two-year period following the fire, and they intentionally chose not to seek an appraisal during that. Additionally, the plaintiff argued that the parties had engaged in all-encompassing litigation that included comprehensive and expensive discovery. Specifically, the plaintiff argued that it had spent well over 900 hours litigating the case, which included preparing and serving discovery requests, as well as reviewing, objecting, and responding to the defendants’ discovery requests. The plaintiff argued that the defendants could have moved to stay the litigation and compel an appraisal much earlier in the case, and that the plaintiff would suffer prejudice if the court compelled an appraisal now. Also, the plaintiff argued that bifurcating the claims in the dispute on two pathways would cost the parties more in time and monetary expenditures. In consideration of the parties’ arguments, the Court did not find that the plaintiff would suffer prejudice if the Court required an appraisal. First, the plaintiff was on notice that the defendants would potentially pursue an appraisal. Second, as the defendants noted, an appraisal is not self-triggering; the appraisal clause is only triggered if and when the parties disagree on the amount of the loss or the value of the covered property. In this case, the defendants needed to obtain certain documents and make a reasonable inquiry before they could determine if there was a dispute over the loss or the value of the property. The defendants properly demanded an appraisal after the adjustment of the last claim submitted by the plaintiff. While it was true that the defendants may have realized earlier in the litigation that there was a dispute over certain elements of damages, it would have been inefficient to compel separate appraisals in a piecemeal fashion. Finally, to the extent that the plaintiff noted that the parties engaged in all-encompassing discovery prior to the filing of the defendants’ motion to compel appraisal, the Court noted that the plaintiff had not distinguished between the amount of time that was related to coverage issues, as opposed to the amount of time related to the loss or value of the property. An appraisal would not have addressed or resolved any disputes over coverage. Therefore, the time and money spent litigating the coverage issues would have been incurred whether or not the defendants sought an appraisal. Therefore, it could not be said that the time spent in litigation was inconsistent with the defendants’ right to an appraisal. The defendants’ motion to compel appraisal was granted.
Superior Court – Animal Liability Exclusion – Summary Judgment
In Diamond State Ins. Co. v. Mancini Realty LLC et al, the insurer filed an action seeking a declaration that there was no insurance coverage for an alleged dog bite incident based on the insurance policy’s animal liability exclusion. In an underlying action, the plaintiff alleged that he was on the premises owned by Mancini Realty LLC (“Mancini”) when he was bitten by a dog and/or dogs. The animal liability exclusion that the insurance did not apply to “ ‘bodily injury,’ ‘property damage,’ ‘personal and advertising injury,’ or medical payments involving any animal or breed of dog, listed below, that is owned by, or in the care, custody, or control of the insured or a tenant. Animal: a) Any animal with a prior bite history….” The insurer filed a motion for summary judgment and relied on a police report regarding a dog bite incident from the prior year for the proposition that the dogs had a history of biting. In reviewing the evidence, the Court noted a number of genuine issues of material fact. First, there was no evidence that the dogs involved in the two alleged attack incidents were in fact the same. Relatedly, the evidence did not establish whether any of the three dogs inflicted bites in both incidents. Moreover, there was no evidence that the dogs were the same, other than claimed common ownership, which was only alleged but not proven. Second, the police report of the prior incident did not actually state that the dogs in question “bit” anyone. Rather, it stated that there was an “attack,” and that another dog injured in the attack required stitches. The Court acknowledged that a lay person could guess that if the injured dog required stitches, one or more bites were involved. However, in a summary judgment setting, the Court could not guess how the injuries occurred. Because the insurer could not properly support the position that any of the dogs had a bite history, let alone that they were involved in the underlying incident, the motion for summary judgment was denied.